Today we analyse the government’s initial briefing for the 2018-2019 Australian Federal Budget and bring you the information contained in that briefing about illegal phoenixing activity. These are extremely important issues for directors of companies to be aware of so listen on for our quick updates on the Federal Budget 2018 in relation to combating illegal phoenixing.
Episode Highlights:
- What is illegal phoenixing?
- New phoenix offences introduced
- Preventing directors from improperly backdating resignations
- How is government going to prevent directors from improperly backdating resignations?
- Extension of the director penalty regime
- Warnings and reminders for directors and suppliers
Hi it’s Joanna Oakey here and welcome back to talking law. Today we are talking about the Federal Budget 2018 and in particular the introductions in relation to combating illegal phoenixing. The government has just a couple of days ago announced their plans to reform the corporations and tax laws and provide regulators with additional powers in an attempt to deter and disrupt illegal phoenixing activity.
What is illegal phoenixing?
Illegal Phoenixing is where a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts.
An example here is that a director might be running a company responsibly but remains unable to pay its debts. So then the director transfers the company assets to another company with the same or similar name often for little or no value before then handing the company over to a liquidator. The director then seeks to avoid paying any creditors including suppliers and employees through the failed company’s liquidation as it’s wound up and then continue to operate the new entity that has been stripped out of these liabilities.
Often the ATO being one of the highest level creditors and as I said before you know other creditors might be suppliers, employees and business partners. Now this practice of Phoenix seeing results in customers not receiving goods or services they have paid for if they’ve prepaid. Obviously lost income for suppliers who may have provided goods or services on credit and haven’t been paid for those, lost taxation that hasn’t been paid to the ATO and lost wages and entitlements for affected employees.
Effectively the government looks at it in this way. Illegal phoenix operators gain an unfair advantage over their honest competitor businesses. And this of course has a broad economic impact and the word Phoenix effectively comes of course from the fable of the phoenix bird rising from the ashes, so this is where the phrase has come from.
New Phoenix Offences Introduced
Let’s talk about the government’s reforms. The government’s reforms in the new budget as has been proposed just in the last few days is that new phoenix offences will be introduced to target people, effectively directors who conduct or facilitate illegal phoenixing.
- When we’re talking about those who conduct or facilitate this phoenixing activity, as I said, obviously the directors will be considered. But this looks like it might also be broader in bringing in the pool of advisors who might be conducting or facilitating this phoenixing as well.
- Now the next element of the reform is to prevent directors from improperly backdating resignations to avoid liability or prosecution and I talk about this a little bit more in a moment. But effectively it relates to limiting the ability of directors to resign when this would leave the company with no directors.
- The reforms are also aimed at restricting the ability of related creditors to vote on the appointment, removal or replacement of an external administrator.
- They also aim to extend the direct a penalty regime.
So let’s talk about some of the detail behind all of this.
Preventing directors from improperly backdating resignations
Now as I said part of the government reforms intend on preventing directors from improperly backdating resignations. Now you might ask why would directors want to backdate resignations? Why would they want to resign from a company?
This is because illegal phoenixing provisions essentially mean that directors can be exposed to the company participating in the illegal phoenixing during the period of time that they a director of the company. So whilst their director of the company they’re exposed to what the company is doing.
When looking at whether a company is engaged in illegal phoenixing activities, the regulators will look at whether or not someone is the director of the company that is wound up and not paying its creditors whilst also being the director of a new company by the same or similar name.
So one of the things that the government is trying to do here is close the loophole of directors then resigning and leaving the company with no directors or resigning but backdating resignations in order for them to set up these arrangements so that they aren’t being seen as being a director of old company and new company at the same time effectively, whilst these transfers are happening and the old company is entering into liquidation.
How is government going to prevent directors from improperly backdating resignations?
The budget detail talks about an enforcement strategy including a mobile strike team, more audits, a black economy hotline for members of the public to report black economy and illegal phoenix activity. They’re also focusing on better data analytics and educational activities i.e. activities a bit like this, where they’re making it clear to the public who are directors what is illegal and what measures they should be avoiding if they are suffering cash flow issues within a company.
Restriction of the ability of related creditors to vote on the appointment, removal or replacement of an external administrator
Often what happens is that organisations who are suffering cash flow issues and considering liquidating the business or starting a new business might stack the creditor list so that they can then drive who is appointed as an external administrator so that they can retain control in choosing the appointment of the external administrator.
As such the government is looking at its reforms to restrict the ability of creditors to vote on the appointment, removal or replacement of an external administrator of a collapsed firm in an attempt to combat these illegal phoenixing practices. So it will be interesting to see more of these details as it comes out in relation to how this will actually work.
Extension of the director penalty regime
But the other element that I particularly wanted to talk about is the extension of the director penalty regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for these elements of the company’s debts and the ATO’s expanded powers to retain refunds where there are outstanding tax lodgements.
At the moment we have something in place called a director penalty regime and that means that if directors don’t lodge Pay As You Go withholding amounts and superannuation guarantee charge amounts within three months of the due date. So if they don’t lodge their BASs within three months of the due date and pay the BASs within three months the due date, they can become personally liable for these costs.
Now prior to this current director penalty regime introduced a few years ago, directors weren’t personally liable until they had received a director penalty notice and that notice had expired. So what it meant was many years ago when this was the case, directors had some way of getting out of the personal liability but under the legislation introduced a few years ago directors now have become personally liable automatically for the penalty amount until it is paid in full.
So what this means is that under the new Federal Budget this regime is looking to be extended to apply to unpaid GST. So effectively that means now if you’re a director of a company that fails to lodge and pay its BASs within three months of the due date, all of the directors of the company will become automatically personally liable for the company’s debts relating to pay as you go withholding amounts that hasn’t been paid, superannuation guarantee charge amounts that haven’t been paid, unpaid GST as well as unpaid luxury car tax and unpaid wine equalisation tax. So this is personal liability attaching to the directors even if the company is wound up, if indeed the BASs hasn’t been lodged and paid within three months of their due date.
Warnings and reminders for directors and suppliers
So that’s our snapshot of the illegal phoenixing provisions in the Federal Budget 2018. Some of these areas are certainly not new but they’re an expansion of the position under the legislation at the current time and of course the proposal for the extension of this legislation should be another warning for all directors out there to be very careful about how they’re managing their reporting and payment obligations with the ATO if they are undergoing a bit of a cash crunch which often comes for businesses as they grow or go through cyclical ups and downs in their business and it’s also perhaps a really important reminder for directors about their own asset protection.
Of course, it’s another reminder that directors need to be close to the accounts on what’s happening in companies of which they are a director. It’s really important that directors are actively involved in what is happening within the company because you can become personally liable even if you have no awareness of what’s happening with the accounts and the lodgements side of your business.
And then from a supplier perspective I think this is heartening the development of the legislation because it’s really sad from a supply perspective in getting caught up in having a large outstanding balance with an organisation that then ends up being liquidated. And it’s particularly more frustrating if you then know that that business has effectively started to trade again from another clean entity but effectively with the same name, employees and business outfit as they were running under the organisation that owed you money.
So I think the reforms are good from that perspective but of course it’s a real reminder for directors to stay close to the accounts and close to understanding what’s happening with lodgement and payment.
Great. Well thanks for tuning in to this episode of talking law if you’d like more information about this topic. Head over to our website at talking law dot com dot au where you can see the transcript of this episode. And you can also find out how to contact our lawyers at aspect legal if you would like help with any of the items that we covered today.
If you’re a supplier and you’re worried about amounts that are outstanding to clients where you’re concerned you may not get paid, seek advice quickly because quite often there’s a lot that you can do if you’re getting quick enough.
And if you’re director of a company that’s undergoing a cash flow crisis, then contact our lawyers to get advice on what you should be doing to ensure that you’re avoiding this director penalty personal liability regime.
And finally, if you enjoyed what you heard today please pop over to iTunes and leave us a review. Thanks again for listening in! You have been listening to Joanna Oakey and talking law brought to you by the metal legal practice aspect legal. See you next time.
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